The covenant of good faith and fair dealing is an implied promise in contract law that any parties to a contract will interact in an honest and fair manner as well as exhibit good faith in their dealings with one another. In an employment law context, this means that an employment contract or agreement will bind both the employer and an employee to act in accordance with these legal duties.

In other words, the employer must act honestly, fairly, and in good faith when dealing with their employee, and vice versa. The covenant of good faith and fair dealing is especially important in an employment setting. This is because it aims to stabilize the imbalance of contracting power between these two parties.

Additionally, this covenant also helps to protect against unfair and immoral terminations, which can be difficult to prove since most employment relationships in the U.S. are considered to be “at will.” This means that an employer can terminate an employee for any reason at any time, so long as that reason is valid, and that an employee can leave an employer for any reason at any point as well.

Thus, if you are an employer or an employee who believes that the covenant of good faith and fair dealing has been breached, then you should contact a local employment lawyer immediately. They can provide further legal advice on the next steps you can take to resolve the matter.

What Does it Mean to Act in Good Faith and Deal Fairly with an Employee?

Both an employer and an employee have a duty to act in good faith and deal fairly when they enter into an employment contract. However, an employer owes certain further obligations to their employees in order to comply with this covenant. In most cases, an employer can act accordingly by reviewing the terms of an employment contract. This is because employment contracts typically have provisions that outline the employer’s required duties.

For example, an employment contract may explicitly provide for when an employer has a right to terminate an employee for specific conduct. An employer can show that they acted in good faith and dealt fairly with an employee by honoring those reasons and only terminating employees if they behaved in such a manner.

Employers who do not have a written employment agreement, however, will be bound by the covenant of good faith and fair dealing by only terminating employees when they have a good cause for doing so. Such reasons will be discussed in greater detail in the section below.

Of course, an employment agreement may not contain every single legitimate reason as to why an employer may terminate, promote, or hire an employee. Some reasons, such as for inciting physical violence at work, may be implied. However, it would not be considered appropriate for an employer to fire or not hire an employee because they did or want to take advantage of the employer’s work-from-home policies.

In fact, such conduct by an employer would be a clear violation of the covenant of good faith and fair dealing. A prospective candidate may have turned down a higher paying position to be hired under the guise of a work-from-home policy or stayed at their current position to reap the benefits of a work-from-home policy, but then were terminated once they tried to use it. Regardless, the same or similar behavior by an employer would be a breach of the covenant.

What is a Good Cause to Fire an Employee?

The phrase “good cause” means that an employer must have a valid and legitimate reason for terminating an employee. To determine whether a firing is based on a valid and legitimate reason, the reason must generally be related to the employee’s work performance, job position, and/or company needs. For instance, if the company is downsizing or in danger of going bankrupt, this may be a legitimate reason to lay off certain employees.

Some other examples that may qualify as a good cause to fire an employee include the following reasons:

  • If an employee is harassing other employees;
  • If an employee commits or intends to commit a crime (e.g., steals from the company or threatens violence towards other workers);
  • If an employee repeatedly exhibits insubordinate tendencies;
  • If an employee demonstrates recurring incidents of misconduct or poor work performance (e.g., low productivity, poor work product, missing meetings, arriving late to work, and so forth); and/or
  • If an employee is caught revealing company information that they are under contract not to disclose (e.g., trade secrets, upcoming products, etc.).

On the other hand, an employer may not be able to show that they have a valid and legitimate reason or a good cause for firing an employee if the employer terminates an employee because they are a parent to a child out of wedlock. Employers who terminate employees due to their race or gender will also not be able to show that they have good cause since such reasons will be deemed to be employment discrimination, which is illegal.

Other Tips about the Covenant of Good Faith and Fair Dealing

It is important to note that the covenant of good faith and fair dealing can affect all aspects of an employment relationship, not just the breach or a termination of an employment contract. For instance, if an employment contract contains provisions regarding an employee’s fringe benefits or payments, an employer must abide by such provisions as well as any other duties they have under an employment contract.

Despite the vast protections that the covenant of good faith and fair dealing provides in an employment context, an employer or employee will be required to have sufficient evidence in order to prove that the covenant has been breached. This is because a party must demonstrate that serious wrongful conduct has occurred before they can prove that this covenant has been violated.

Some examples of the type of conduct that may be considered a breach of the covenant of good faith and fair dealing include the following:

  • Terminating an employee right before their pension vests for improper reasons, such as the employer does not want to have to pay out the employee’s pension.
  • Fabricating reasons or excuses for firing an employee in order to replace them with a different individual who may work for less money due to being inexperienced.
  • Terminating a worker to prevent them from collecting on commissions (e.g., if an employer fired a sales representative to reap the benefits of a huge commission).

An employer can avoid breaching the covenant by complying with the relevant laws, their company’s policies and procedures, and by being honest and fair when dealing with an employment issue or dispute. This does not mean an employer can never fire an employee with an employment agreement, it just means that they must do so in an honest and fair way.

For example, employers should document the firing, follow HR protocols, and have a valid reason for terminating an employee. If both the employer and their HR department are unsure of whether their termination policies are legal, it may be in the company’s best interest to consult with legal counsel. Otherwise, they might be facing a claim for wrongful termination.

I’m Confused about My Duties under the Covenant of Good Faith and Fair Dealing, Do I Need a Lawyer?

The covenant of good faith and fair dealing may be an implicit promise, but that does not mean that breaking this sort of promise will not lead to serious legal ramifications. Therefore, if you are confused about your duties under an employment contract as either an employer or an employee, then it is generally recommended that you contact a local contract lawyer for further legal advice on such topics.

An experienced employment lawyer can review the terms of an employment contract and will be able to inform you of your rights and obligations under the contract. Your lawyer will also be able to confirm whether the contract is valid and legally enforceable in a court of law.

In addition, if you need to modify the terms of an employment contract, your lawyer can make sure that the new provisions are fair and that the contract comports with the most current laws.

Finally, if you believe that an employer or an employee has breached the covenant of good faith and fair dealing, your lawyer will be able to help you file a lawsuit against that party. They can assist you in drafting any necessary legal documents for your case. Also, if you need legal representation in court or during any other type of dispute resolution method (e.g., arbitration or mediation), your lawyer will be able to provide these services as well.